Local Puerto Ricans Fear Loss Of Island Tax Break

Puerto Ricans In Hartford Fear Loss Of Island Tax Break

May 06, 1993|By DAVID LIGHTMAN; Washington Bureau Chief

WASHINGTON — What began at Hartford's Costa del Sol restaurant as a friendly, fiery discussion about the taxes Puerto Rican companies pay spilled over Wednesday into the highly charged world of congressional tax politics -- and the Hartford view was greeted with a cold shoulder.

On the menu, along with the paella, was a look at a provision tucked discreetly into President Clinton's economic package -- one that would erase the current law that allows many companies to operate in Puerto Rico almost tax-free.

It is a law that, for those at the restaurant table, has led to substantial investments and many jobs in their homeland.

In its place, the White House would give companies a partial tax break on the wages paid to employees in Puerto Rico, thus saving the federal government $7.2 billion during the next five years.

It was clearly an unappetizing trade-off. The leaders at the restaurant, like many back on the island, howled.

"This would be a disaster," said Edwin Vargas, the city's Democratic chairman and chairman of Kennelly's Hispanic advisory board.

Hector Luis Acevedo, the mayor of San Juan, had the same reaction, telling Congress at a hearing earlier this year that the current tax break is "the backbone of our economy."

So, as the House Ways and Means Committee deliberated for a second day Wednesday over how to write a deficit reduction bill, and the Puerto Rico change came up, Kennelly and Rep. Nancy L. Johnson, R-6th District, spoke up.

But that is about all they could do. Afterward, they were not optimistic.

"It's in trouble," said Kennelly. "Big trouble," added Johnson.

The tax break originated in 1921 to help American companies

establish operations in the Philippines and other unincorporated territories of the United States. It has been revised several times, and in recent years Puerto Rico has been the biggest beneficiary.

The island's manufacturers' association estimates that one of every three jobs is directly or indirectly generated by operations helped by the tax break. About 70 percent of factory workers are employed by companies getting the aid.

But the Clinton administration believes the break is too often used by companies to make bigger profits, not create jobs. It also saw a way to change the tax law to save money, and to help an old friend, Resident Commissioner Carlos Romero Barcelo, the island's representative in Congress.

The change is a small part of the $266 billion tax plan now being considered by the House committee. But when members of Connecticut's Hispanic community heard about it, they reacted like "wildfire," Vargas said.

"We all have a lot of relatives over there. These are their jobs that would be affected," he said.

There were more meetings between members of Congress and the community, which is now organizing a letter-writing campaign to members.

State Rep. Juan A. Figueroa, D-Hartford, also met with Kennelly on the matter recently. He visited Puerto Rico two weeks ago with representatives from five states. Figueroa was raised on the island and lived there for more than 20 years, and his parents live there still.

"If 936 [the tax law] is substantially changed, it could mean the loss of jobs for the island," Figueroa said. "The economy of the island has always depended on these types of incentives to keep an economic base. If the jobs leave the island, then you'd have an economic crisis."

A key component of Puerto Rico's economic development has been the movement of major American pharmaceutical companies -- such as Pfizer, Eli Lilly and Johnson & Johnson -- that have brought jobs to the island, Figueroa said.

Rather than lose the tax incentives completely, Figueroa said he would support a compromise to cut the loss in half.

But he and his allies face three formidable Washington obstacles.

First, they are bucking the president and the resident commissioner. Romero called the tax break a "free ride" for many companies, and called cries of economic havoc "wild claims, distortions and exaggerations."

Second, the issue is largely unfamiliar to many members of Congress. With so many other major battles to fight -- the energy tax, health care, higher income tax rates -- few lawmakers are expected to spend their political capital on this.

Third, the change is being portrayed as little guys vs. big guys. The Treasury Department cited its 1989 study of the tax break that showed the pharmaceutical industry took in 50 percent of the benefits that year. A recent study by the General Accounting Office made a similar finding.

The pharmaceutical industry insisted it was not being greedy. "You don't set up an operation to produce jobs, but profits. Profits lead to jobs," said David Emerick, consultant to the Pharmaceutical Manufacturers Association, the industry trade group.

What may save the break is the intense effort being launched on several levels, including on members of Congress with large Puerto Rican constituencies.

But thus far, the Clinton administration will not budge. Kennelly and Johnson Wednesday formed a one-two punch on the committee, drilling Treasury officials about why the change was so sorely needed.

The tax law, said Johnson, "has been very successful." Without it, there would be all kinds of economic disruption.

"I have to tell you," Kennelly told the officials, "I had a large meeting with people who said it would affect employment. They are very worried."

After the exchange, so were Kennelly and Johnson.

"After all," said Kennelly, "it's the president of the United States who wants to change this."